Before the 1992 general election, Labour leaders facing a tight race embarked on a self-abasing tour of the City of London, mocked as the prawn cocktail offensive. “Lunch after lunch, dinner after dinner, the assurances flow,” trolled Michael Heseltine. “All those prawn cocktails for nothing. Never have so many crustaceans died in vain.”
He was right: the Conservatives won a fourth consecutive victory.
Five years later, Tony Blair’s New Labour genuflected deeply to the UK financial sector and was elected, but its “light-touch” regulatory approach helped trigger the biggest global financial crisis in nearly a century. We still feel the aftershocks in the form of economic stagnation, inequality and pent-up rage. John McDonnell, then shadow chancellor, tried a “tea offensive” in 2018 to listen to City leaders’ concerns, but, alongside Jeremy Corbyn’s promise to “take on the power of finance”, it got nowhere. Now, once again, Labour, under Keir Starmer, is bending the knee.
The shadow chancellor, Rachel Reeves, promises to “unashamedly champion” the City. Labour’s “plan for financial services”, unveiled last month, is heavily influenced by City grandees. It contains plenty that is sensible, including a push for “inclusive growth” and a promise there is “no going back” to the disastrous deregulation of the past – but it is still something of a love letter to the City. Labour is refusing to reinstate a cap on banker bonuses that Liz Truss had unwisely removed. It is ruling out a windfall tax on bank profits, and promising to cut the “regulatory burden”. It is watering down its £28bn green investment plan, in a City-pleasing display of “fiscal rectitude”.
Ominously, Labour also embraces “competitiveness” for UK finance. This C-word sounds great – who wants to be uncompetitive? – but unpack it and a vast can of worms opens, as 58 leading international economists explained in a powerful letter in 2022, urging Rishi Sunak not to force a “competitiveness” mandate on to financial regulators.
One problem is that “competitiveness”, in City-speak, means transferring wealth from other parts of the UK economy to the financial sector, to help “our” poor financiers compete globally. Finance, predominantly located in London, competes against other parts of the UK economy: not least via a “brain drain”, sucking talent out of manufacturing and services into high-paying City firms. It also captures policymaking, bending it from supporting non-financial businesses or the broad public interest towards narrow City profits.
We do need a financial sector – but only up to a point. Some international studies suggest that once credit to the private sector by banks and shadow banks hits 80-100% of GDP (the UK is running closer to 145-165%), then further expansion weakens GDP growth. It’s called a “finance curse”, which in some ways resembles the “resource curse” afflicting commodity-rich nations in the global south.
It’s not just about size, of course: it’s what kind of finance. Today, businesses from food delivery to funeral homes to dentists to music are increasingly financialised, whereby financial investors use powerful financial tools, tricks and levers to suck money out, often leaving fragile “hollow firms” in their wake. For example, a private-equity firm may buy a company owning care homes, load it with debt – then use a “dividend recap” to snaffle the proceeds of that borrowing for itself, then put the company through the wringer to repay those debts: forcing care workers to work punishing hours, stiffing its suppliers or running its finances through tax havens to dodge tax.
Finance is also the handmaiden of rising monopolisation, whether it’s investment bankers pushing and facilitating mega-mergers and acquisitions; or banks throwing cheap capital at profitable monopolists while starving their smaller, weaker and riskier competitors. Meanwhile, private-equity firms “roll up” obscure economic niches, such as buying all three vet practices in a medium-sized town, then jacking up prices and cutting wages once pet owners and skilled staff have few other options.
City lobbyists tell us that UK finance is the engine of our economy, showering jobs and tax revenues on happy citizens. Labour is toeing this line, saying its goal to secure the highest growth among G7 countries can only happen “if we champion the UK’s role as a global leader in financial services”, with finance as our “engine of growth”.
But this “engine” story is City propaganda. It describes (and overstates) the gross benefits of the City to the UK – the banks’ tax payments and so on – but airbrushes out the costs and the hidden flows in the other direction, away from children’s care homes, from vet practices, or from homeowners, and into the pockets of financial investors based in rich parts of London, overseas and offshore.
Praising these gross contributions, as if this is the end of the story, is like letting someone swipe your wallet then thanking them for handing half your money back. What should matter to our elected leaders is the City’s net contribution to the economy, taking into account the damage. There’s no way to measure this precisely, but a Sheffield University study estimated that “excess” finance cost the UK economy a cumulative £4.5tn between 1995 and 2015.
Is it any surprise that Britain, with its bloated and distorted financial sector, has been such a laggard among OECD economies on investment, productivity and growth? Starmer himself has warned that Poland’s economy is on course to overtake ours within a decade.
Unlike in previous elections, Labour doesn’t need to bend the knee: it is set for a crushing victory over a comically unpopular Conservative party. If Starmer and Reeves stay this course, telling finance exactly what it wants to hear, the ensuing economic malaise will create openings that dangerous political forces will be only too happy to fill.
Nicholas Shaxson is co-founder of the Balanced Economy Project
